How Pritzker's tax proposal sets up a pricey cliff and penalizes marriage

E. Jason Wambsgans/Chicago Tribune

Gov. J.B. Pritzker delivers his first budget address on Feb. 20, 2019, to a joint session of the Illinois House and Senate.

Gov. J.B. Pritzker delivers his first budget address on Feb. 20, 2019, to a joint session of the Illinois House and Senate. (E. Jason Wambsgans/Chicago Tribune)

David J. Roberts

Illinois has serious fiscal problems, and a constitutional amendment to allow for a progressive income tax rate structure might help. That is a complex policy question worthy of serious analysis and robust debate. But even those of us who support the concept of a progressive rate structure should recognize that the current proposal, as released March 7 by Gov. J.B. Pritzker, is severely flawed and would have serious negative consequences.

In other words, extra dollars of income do not cause the income from a lower bracket to move into a higher bracket. That’s how a progressive rate structure is supposed to work. And that’s how this rate structure would work, until you get to the top bracket.

Beware: Dangerous cliff

When it says that the top rate would be 7.95 percent on net income over $1 million, you would expect that rate to apply to just the extra dollars of income above the $1 million mark. But that’s not how this proposal would work.

For example, if net income goes above the $1 million threshold by just one dollar, that dollar plus the entire $1 million of income that would have been in the lower brackets, all gets pushed into the top bracket, where all of it would be taxed at 7.95 percent.

Think of this as a progressive rate structure with a cliff. At the million-dollar threshold, one extra dollar of income puts you over the cliff. Ignoring the effects of any other tax provisions, that one dollar of income would cost $8,565 in additional tax, an incredible marginal rate of 856,500 percent on that dollar. Imagine the efforts that taxpayers would go through to avoid being taxed on extra income if they were close to that threshold. And a tax like this might cause some wealthy individuals to flee Illinois altogether.

Taxing marriages

Under the proposal, the same rates apply to both single and joint filers. So, for example, two single individuals who each have $250,000 of net income would each pay at a rate of 4.95 percent on income above $100,000. If they marry one another, their combined $500,000 of net income means that the second $250,000 would be taxed at 7.75 percent. Ignoring the effects of any other tax provisions, this results in $7,065 of extra tax, a giant marriage penalty.

And if that’s not bad enough, visualize what would happen if the numbers were larger, and marriage also put them over the cliff.

The governor’s announcement did not address married-filing-separately status, which generally receives unfavorable treatment for federal tax purposes. Presumably any final plan would try to limit its use in avoiding Illinois taxes.

If the plan would double the size of the rate brackets on a joint return, that would eliminate the marriage penalty, but it would result in much less tax revenue. And it would create big potential marriage bonuses. A single person with high income might marry someone with little or no income, and that couple could benefit from lower brackets.

The marriage penalty has been an ongoing problem in the federal income tax and can be expected to present problems whenever we have a joint return and a graduated rate structure. But at the federal level, there have been major efforts over many years to at least try to address those problems. This proposal looks like it was designed to impose marriage penalties to bring in revenue. And you don’t have to be a staunch family-values conservative to oppose that.

A well-designed progressive income tax might help in addressing some of the state’s fiscal problems. That would be worth analyzing and debating. Unfortunately, this is not a proposal for a well-designed progressive income tax.

David J. Roberts is an associate professor of accountancy at DePaul University.